Govt must make hard choices in new budget
By Rikza Abdullah
President Soeharto is scheduled to present the government's draft budget to the House of Representatives on Tuesday. Saddled with its worst economic crisis in 30 years, the government confronts an unenviable choice between cutting spending in compliance with the prescription of the International Monetary Fund, or boosting it to stimulate growth. The Jakarta Post interviewed several economists about their predictions for the budget, and what they believe would be the best remedy for the ailing economy.
JAKARTA (JP): There are two possibilities when President Soeharto unveils the draft government budget for the fiscal year starting April 1. Spending could go up, as it has always done, or there could be the precedent of it being reduced.
Many economists fear the latter will be the case, with all its attendant severe consequences for the economy, but they still hold hope the government will have the will to bolster spending.
A term in the IMF's US$40 billion rescue package loan for Indonesia in October was that the government strive to produce a budget surplus equivalent to 1 percent of the country's gross domestic product.
With the GDP estimated at Rp 474.63 trillion in March 1997, this translates into the government endeavoring to earn Rp 4.7 trillion more than it intends to spend during the year.
It can achieve this by bolstering income, a difficult if not impossible course under the current economic downturn, or cut back on spending, an unpopular but more likely measure. This would be a departure from the long-held principle of a balanced budget.
The implication is that the government will take more money out of the economy than it is putting in. It will be a contractive budget, one that will affect aggregate demand in the economy already battered by the economic crisis.
Sri Mulyani, an economist at the University of Indonesia, said the IMF term was intended to take off the pressure on Indonesia's balance of payments.
"But we hope the government would also try to use the budget as an instrument to contain the domestic effects of the monetary crisis -- high inflation and unemployment -- and to stimulate economic activities," Mulyani said.
"A surplus budget will contract the economy. The government should renegotiate with the IMF on the surplus requirement."
The government's budget has never been a major instrument to stimulate growth. Instead, people were looking at economic reform policies, including deregulation and debureaucratization, as stimulants.
Economists agree a contractive budget is bound to have severe repercussions on the economy.
Didi J. Rachbini, director of the Institute for Development of Economics and Finance, said the government should not feel obliged to meet the IMF's requirements on the budget surplus in view of the stagnant economy.
Economist Kwik Kian Gie said the budget clause would lower people's purchasing power because the government would likely try to collect as much revenue as possible through taxation, but limit its spending for development activities.
Mari Pangestu of the Centre for Strategic and International Studies said the government would effectively cease to play any role in stimulating the economic growth rate if it complied with the IMF's term.
The monetary crisis has already lowered economic growth projections from an optimistic 7 percent to 5 percent at best. Economists now predict the growth rate will plunge to between 1 percent and 3 percent this year. The economy needs to grow by at least 5 percent annually simply to absorb the two million young people who join the labor market each year.
The major political forces have also called on the government to raise its spending in 1998/99 despite the IMF term. Golkar has proposed a balanced budget of Rp 110.9 trillion, the Armed Forces called for spending totaling Rp 113.35 trillion and the United Development Party for spending of Rp 115.7 trillion.
Analysts believe the government is looking for ways to bolster spending since 1998 is regarded as a "political year", with the presidential election in March.
Mari, Kwik and Mulyani believed the government's ability to raise spending in 1998/1999 would be severely limited even if it wanted to follow that course.
There are already predictions the government will not reach its budget targets in the current fiscal year. The current budget is slated to balance between spending and revenues at Rp 101.08 trillion ($18.5 billion at the Jan. 2 exchange rate).
"If the government, for political reasons, wants to raise its spending, it will not exceed Rp 110 trillion," Mulyani says.
She pointed out that revenues from non-oil taxes -- the major supplier of total domestic revenue -- will likely fall to Rp 50 trillion from the Rp 73.1 trillion originally targeted this year due to falling profitability of companies.
Revenues from the oil and gas sectors will come to the government's salvation as they are priced in dollars.
She noted Indonesia's OPEC oil quota had been raised from 1.33 million barrels per day (bpd) to 1.45 million bpd beginning in the first half of 1998, and that the rupiah earnings from this sector would be bolstered following the sharp depreciation of the rupiah against the dollar.
Minister of Mines and Energy Ida Bagus Sudjana has already indicated that the government will calculate the 1998/1999 budget on the basis of an average oil price of $17 a barrel compared to $16.50 this fiscal year.
Mulyani said the government's foreign aid receipts would also increase its revenues when converted into rupiah at the lower exchange rate.
Kwik believed the international community would be particularly interested in the government's exchange rate the government will use in calculating the budget.
It will automatically signal what the government believes is the "equilibrium" level of the rupiah's value, he says.
The rupiah's value has plunged from Rp 2,400 to the dollar in June to more than Rp 5,000.
None of the economists interviewed by the Post thought the government would increase the salaries and wages of civil servants and members of the Armed Forces.
The government most recently raised their salaries by an average of 34.4 percent in May 1997, and had applied 10 percent hikes in each of the three previous fiscal years.
Mulyani said some spending would have to be increased nevertheless, such as servicing the government's debt and in providing subsidies on the domestic sales of fuels.
But many analysts are also predicting the fuel subsidy may have to be phased out in the coming fiscal year.
Mulyani predicted the crisis would eliminate the government saving -- the difference between total domestic revenues and routine spending -- which in the past exceeded Rp 20 trillion.
She said most of the spending cuts in the next budget would have to come from the government's development spending (public investment), set at Rp 38.92 trillion in 1997/1998, to reach about Rp 27 trillion if it has to allocate a surplus equivalent of 1 percent of GDP.
Kwik forecast that development spending may fall to as low as Rp 21.73 trillion.